Friday, April 1, 2011

The Returned Appetite for Risk

The WSJ reports that investor's appetite for risk is once again increasing.  In a passage that chilled Noman's blood, the article described how one public company sold stock in order to raise cash to leverage their purchases of "alt-a" bonds with bank loans.  You remember those from the crisis that nearly collapsed the global economy just three years ago.

MFA Financial Inc., a publicly listed company that invests in mortgage bonds, has been buying since the market stabilized, doubling its holdings in 2010.  Last year, MFA was buying $100 million worth of the bonds a month. Recently it boosted its buying to $300 million a month. Early in March, it raised $500 million by selling stock so it could buy so-called "prime" and "alt-a" bonds, which are bonds backed by mortgages taken out by borrowers with generally better credit than subprime borrowers. MFA is buying more now because it's easier to get funding from lenders who, they say, are less worried about the risks.
Banks are less worried about risks?  It's good news that credit is becoming more available.  But, Noman thinks it's bad news that credit is once again becoming readily available for speculative purposes.  What that tells him is that investors believe that the government will once again have taxpayers pay lenders 100% on the dollar for their bad loans, under the too-big-to-fail rationale.  Wasn't Dodd-Frank supposed to fix that?

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